Monetary Policy and the Economy Q1/08

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• Monetary Policy and the Economy Q1/08 (PDF, 865 kB) March 2008.

Studies and Analyses

• Inflationary Pressures Worldwide despite Downturn in Growth (PDF, 212 kB) Pointner, Schneider, Schreiner. Pointner, Schneider, Schreiner – Monetary Policy and the Economy Q1/08 The international environment is increasingly being dominated by a cooling global economy. In the U.S.A., the real estate and financial crisis has spilled over to the real economy. Growth in consumer demand has declined, and the deterioration in the labor market suggests a deepening of this trend. In addition, the leading indicators point to a marked downturn in growth, and major Austrian and international organizations recently downgraded their GDP forecasts for the U.S.A. In the euro area, the economy likewise weakened somewhat in the fourth quarter of 2007. Despite the increased euro exchange rate, net exports made the largest contribution to GDP growth. Domestic demand was driven by gross fixed capital formation while consumer spending was down for the first time since 2001. The latest macroeconomic projections by ECB staff experts anticipate a slowdown in the euro area’s GDP growth for 2008. In February 2008, euro area inflation (based on the HICP) reached 3.3%, a record high since the euro area was created. This rise is primarily attributable to the increase in energy and food prices. The increase in the euro exchange rate occurring in the same period mitigated the inflationary pressures to some extent. The projections for inflation in 2008 were further upgraded. Despite the international financial crisis and its dampening effects worldwide, the Austrian economy looks surprisingly healthy. The OeNB economic indicator of March 2008 signals only a modest downturn in GDP growth for the first half of 2008. en global outlook, euro area, central and (south-)eastern Europe, Austria. E2, E3, O1 Mar 31, 2008, 12:00:00 AM

• Current Inflation Developments in Austria (PDF, 370 kB) Fritzer, Gnan, Köhler-Töglhofer, Rumler, Stiglbauer. Fritzer, Gnan, Köhler-Töglhofer, Rumler, Stiglbauer – Monetary Policy and the Economy Q1/08 HICP inflation in Austria increased from below 2% in the first half of 2007 to 3.5% in December 2007, and stood at 3.1% in both January and February2 2008. As in other countries, this increase can be mostly attributed to the surge in international energy and agricultural commodity prices. Whereas the increase in the price of crude oil was passed on to fuels very quickly, electricity and gas prices exhibit a delayed reaction. The increase in global prices of agricultural commodities fed through to the prices of dairy products and oils and fats more strongly than it did to bread and cereal product prices. Rates of inflation exceeding 5% were also recorded for clothing and footwear from September to December 2007. The inflation expectations of consumers and professional forecasters for 12 months ahead have risen in light of this; however, professional forecasters generally agree that inflation will decrease to around 2% again in 2009. For the first half of 2008, the Oesterreichische Nationalbank (OeNB) expects the rate of inflation to remain above 3%. Yet by the end of 2008, inflation should slow down significantly to 2.3% as a result of the expected dissipation of the food price shock and the base effect of past energy price increases. On the whole, the OeNB expects the rate of inflation to average 2.8% in 2008. Against this backdrop, the social partners and public policy bear an especially high responsibility: The parties involved in negotiating wage settlements in the coming fall wage round must rise to the challenge of preventing second-round effects. An intensification of competition and the elimination of quantitative agricultural production limits can slow price increases by limiting companies’ price-setting power and/or increasing the supply of agricultural commodities. Given high capacity utilization, stimulating demand through fiscal policy would be detrimental to the goal of reducing inflation. The OeNB estimates that annual inflation in 2008 would be reduced by around + percentage point if all public fees were frozen at their 2007 level. en inflation in Austria, inflation expectations, administered prices. E31 Mar 31, 2008, 12:00:00 AM

• The Importance of Lease Financing for Austrian Municipalities (PDF, 287 kB) Grossmann. Grossmann – Monetary Policy and the Economy Q1/08 The innovation of this paper is to use Central Credit Register (CCR) data to analyze and assess municipal (local government) leasing activities. Among other things, the analysis highlights the different accounting treatment of (real estate) lease transactions undertaken by local governments in their capacity as market producers and as nonmarket producers. The lease financing volume of municipalities totaled roughly EUR 1.1 billion, thus corresponding to 8.5% on average of total municipal exposures as reflected in the CCR. This aggregate figure masks considerable differences across individual municipalities, for which it is hard to find meaningful theoretical evidence. Those municipalities whose leasing deals have been subject to approval by provinces for the longest period tend to report lower lease shares. At the same time, there is little correlation between the credit quality of a municipality and its exposure to lease financing; evidently, credit quality checks are based on comparable criteria irrespective of the financing model of choice. Likewise, there is only a weak correlation between municipalities’ exposure to lease financing and their level of (residual) debt. More highly indebted local government units have not been found to be more inclined to shifting their portfolios to financing forms that do not push up the level of debt. These results suggest that municipalities thoroughly assess options of lease financing on a case-by-case basis as new borrowing needs arise, and that they have become less likely to go for lease financing ever since such deals have become subject to approval by the provincial governments, just like loans. en lease financing, public debt, credit quality, municipalities H63, H72, E62 Mar 31, 2008, 12:00:00 AM

• The Treaty of Lisbon (PDF, 243 kB) Gloggnitzer. Gloggnitzer – Monetary Policy and the Economy Q1/08 The Treaty of Lisbon is the EU’s new legal framework. The EU heads of state or government have agreed on a new EU treaty conceived to ensure that the enlarged EU consisting of 27 Member States functions more efficiently than under the Treaty of Nice, which is currently in place. The Treaty of Lisbon was signed by EU heads of state or government on December 13, 2007, in Lisbon. The Treaty of Lisbon is to replace the EU Constitutional Treaty rejected in national referendums in France and the Netherlands; it has retained large parts of the constitutional treaty’s substance. First and foremost, the new EU treaty represents a reform that introduces increased majority voting, a clear delimitation of EU competences and a changed institutional framework for EU institutions. Other than the general institutional changes, elements of the Treaty of Lisbon relevant to Economic and Monetary Union (EMU) include, above all, the introduction of price stability to the new treaty’s list of objectives, the institutional status of the ECB and the protection of its independence as well as the strengthening of the Eurogroup. The conditions for EMU set out in the Treaty of Maastricht are now reinforced politically in the Treaty of Lisbon. For the EU’s new legal basis to enter into force on January 1, 2009, as scheduled, the Treaty of Lisbon needs to be ratified by all 27 Member States prior to the elections to the European Parliament in 2009. en Treaty of Lisbon and EMU, ECB an institution of the EU, independence of the ECB. F15, F55, K0, K10, N44 Mar 31, 2008, 12:00:00 AM